Let me begin with a summary of the assigned textbook readings, following which I shall talk about maximizing profit calculations.

Chapter 1- Strategic pricing
Pricing strategically is critical to success given the correct market conditions for a new product or for an existing product. The traditional methods of price setting- using cost basis as key determinant, or customer-driven, or market-share – can no longer sustain profits or capture all of the value a firm creates. The pricing pyramid is introduced in this chapter- value creation, price structure, price & value communication, pricing policy and price level. Differences between search goods and experience goods are explained, benefits to customer that include psychological and monetary are discussed.

Chapter 6- Price Level
Despite the tools and analytics available to marketers, price setting comes down to using informed judgement to find a price that balances costs, customer value, and competitor responses. Process involves setting the initial price point within a predetermined price window. Three considerations for an initial price point is alignment with overall business strategy, price-volume trade-offs and customer response. The last one is the most challenging one to determine since there are many non-value related factors that can affect the degree to which price influences a customer’s purchase decision.

Pricing objectives must be identified before hand. The three options for setting prices are skimming the market including sequential skimming, penetration pricing and neutral market pricing. For skimming to work the firm needs a differentiated product or some other competitive edge. Sequential skimming is appropriate for products with low repurchase rates. Penetration pricing involves setting a price low enough to capture substantial market share and is perceived as a high-value purchase by the customer. For this to work the customers should have low switching costs between different firms and competitors should not easily be able to lower their prices as well. However, if penetration pricing is used improperly it can diminish brand value- the price-quality effect. Minimizing the role of pricing in place of using other marketing tools is the core of the neutral pricing strategy. Neutral prices are defined relative to the perceived value of a product. Sony, to my surprise, uses a neutral pricing policy even though its prices are above competitors products because of higher perceived value.

Profit maximizing calculations
profit = unit contribution margin * demand = (price – marginal cost) * demand

Figuring out total cost to the customer is important because it can be a high or low bar for setting your price.

Total cost to customer = acquisition costs (price, paperwork, cost of mistakes in order, etc) + possession costs (holding inventory, quality control, taxes and insurance, etc) + usage costs (field defects, training costs, user labor cost, disposal costs, etc)

Key learnings in class

1. It is easier to calculate value of product or service for industrial products. Very helpful for pricing decisions

2. Calculating value demands intimate understanding of customer economics, should identify value and total cost to customer, consider reality and expectations to get to WTP

3. Look beyond your average customer, and identify segments with different economics to extract full WTP

4. Product value will change over time due to impact of market forces, industry structure, customer experience and competition

5. Align price level with business strategy.

6. Simple cost plus pricing is ridiculous.